Nick Clegg might be unpopular, but there will be no regicide

A turbulent summer has thrown established political calculations into disarray, and since the Westminster establishment had calculated that Nick Clegg was finished, disarray feels like a reprieve for the Liberal Democrats.

The Tories' authoritarian reaction to the riots has given Clegg's party a much-needed opportunity to sound distinctly and dissentingly liberal. Some MPs were openly queasy about the Conservative idea of using benefit confiscation as society's way of exacting vengeance on rioters and their families. Clegg wrote a thoughtful article on 26 August defending the Human Rights Act, days after David Cameron attacked it as a charter for overentitled hooligans.

That is not a populist position, but the Lib Dem leader has pretty much given up on being popular in the short term. Efforts to redeem his reputation after last year's screeching handbrake turn on university tuition fees were counterproductive. Clegg's inner circle now accepts that the leader's attempts to justify the move simply reminded people of their grievance. After the party's simultaneous hammering in local, Scottish and referendum ballots in May, Clegg adopted a lower profile. Voters, in the words of one close aide, "just wanted Nick to go away for a while".

Some recent opinion polls now have the Lib Dems touching the high teens. Others show them struggling to make double figures. Either way a miraculous renaissance is not imminent. "We are bumping along the bottom" is the stark judgement of one senior party strategist.

Cable's battle

Clegg's only hope of recovery lies in being seen to carve out, over time, a distinctly Lib Dem agenda in government. The post-riot response might not have colonised new electoral terrain but it at least helped the party feel good about its liberal credentials, which is a prerequisite to lost followers feeling the same way.

A more promising arena for the Lib Dems to flaunt some principled agitation is the battle currently under way over banking reform. On 12 September John Vickers will publish the final report of his commission, set up in June last year, to examine ways to prevent banks from wrecking the economy again. The report is expected to recommend "ring-fencing" the high street end of banks from their higher-risk investment operations - the wild, "casino" side - but without breaking up the institutions.

The Chancellor, George Osborne, backs this approach. Vince Cable, the Business Secretary, prefers the idea of complete separation - carving up the banking behemoths.

The bankers themselves have been lobbying for the meekest possible regulation. They, along with many Tories, revile Cable as a menace to the City, which is not such a bad image to have in the current political climate. Cable has some leverage in the implicit threat of presenting Osborne as the handmaiden of unrepentant finance. As one Lib Dem cabinet minister puts it: "Voters still blame Labour for the problems in the economy, but they blame the banks more and the Tories don't want to get on the wrong side of that."

In terms of Lib Dem strategy, guerrilla warfare against the banks is largely a maverick, Cable operation, permitted but not directed by Clegg. The Business Secretary runs his own, semi-autonomous, lone wolf economic policy within the Lib Dems. That freedom is the legacy of his peculiar status in opposition as a quasi-celebrity financial oracle - an image that, to this day, provokes scarcely veiled irritation within Team Clegg.

The Lib Dem leader, while no friend of the banks, is hypersensitive to the dangers inherent in fighting the Tories on economic policy. His aides have been hosing down talk of differences between the two parties on tax cuts, for example. The Conservative right has been pressing the Chancellor to stimulate the economy by ditching the top 50p rate of income tax; Lib Dems have been noisily reminding their partners that the coalition agreement insists taxes for low earners should be cut before any others.

Clegg, meanwhile, recognises that by signing up to the general principles of Osborne's fiscal strategy, the Lib Dems have pegged their credibility as a serious party of government to the Chancellor's position. Minor deviations in tone are allowed but there is no question of a retreat from austerity. Any public expression of doubt over the wisdom of budget cuts would be punished as a failure of nerve.

This rules out any flirtation with Labour for the time being. Relations between Clegg and Ed Miliband are cordial at best. They have thawed slightly since the campaign for the Alternative Vote; each side was then contemptuous of the other's role in the defeat. There have since been some civil exchanges between their offices, over Clegg's panel to investigate the riots, for example. But the Deputy Prime Minister is too steeped in the lore of trashing Labour's legacy - social and economic - for either side yet to envisage a strategic rapprochement.

Yellow fingers

The settled Labour view is that Lib Dems have signed up for all the political pain of abetting Tory cuts, with no prospect of electoral gain at the end of it. I have lost count of the number of Labour MPs who have confidently told me that Clegg's career in domestic politics is effectively over. Their only interest in the Lib Dems seems to be the questions of whether they will replace their leader before the election and with whom. (Answer: no; there is no credible alternative. The left of the party is in shades of moral agony, but that is coupled with recognition that a panicky regicide would guarantee the collapse that is already widely feared.)

Speculation along these lines is a diverting political parlour game, but it ignores the current reality that Clegg is the Deputy PM, leading a party with enough seats in parliament and enough ministers in cabinet to leave yellow fingerprints all over government. The best testimony to the Lib Dems' power is the fury it routinely provokes on the Tory right. Hawkish on the deficit, liberal on social policy and populist on bankers; thriftier than Labour but nicer than the Tories, the Lib Dems are squatting stubbornly, sometimes chaotically, in the middle of British politics. The voters might not thank Nick Clegg for it in the opinion polls; the other parties resent him for it. One thing he cannot be, however, is ignored.

Rafael Behr is political columnist at the Guardian and former political editor of the New Statesman